Question

reported the following income statement data for a 2-year peri

Ins E6.11 (LO 3) Writing Wu Jewelry reported the following income statement data for a 2-year period 2020 2019 HK$2,500,000 HK$2,100,000 Sales revenue Cost of goods sold Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold 320,000 440,000 1,730,000 2,040,000 2,050,000 440,000 2,480,000 520,000 1,610,000 1,960,000 Gross profit HK$ 490,000 HKS 540,000 Wu uses a periodic inventory system. The inventories at January 1, 2019, and December 31, 2020, are correct. However, the ending inventory at December 31, 2019, was understated HK$60,000 Instructions a. Prepare correct income statement data for the 2 years. b. What is the cumulative effect of the inventory error on total gross profit for the 2 years? c. Explain in a letter to the president of Wu what has happened, i.e., the nature of the error and its effect on the financial statements.

Answer 1

Sales Revenue				$ 2,500,000.00
Cost of Goods sold
Beginning inventory			$    500,000.00
Cost of goods purchased			$ 2,040,000.00
Cost of goods available for sale			$ 2,540,000.00
Ending inventory			$    520,000.00
Cost of Goods Sold				$ 2,020,000.00
Gross Profit				$    480,000.00

After making the rectification in the beginning inventory of the current year,

gross profit got decreased by $ 60000 in year 2. But if we consider gross profit

of both the years, before making any corrections, combinedly there's no effect.

This is because, as the closing stock was understated in year 1, the gross margin of

that year was also understated by $ 60000. Which resulted in a decreased beginning

inventory and increased gross margin of the 2nd year by $ 60000